Brexit – Implications for VAT

The voice of charities on Tax Brexit – Implications for VAT Graham ElliottTax Adviser, CTG

Charity Tax Group CTG has over 500 members of all sizes representing all types of charitable activity. It was established in 1982 to make representations to Government on charity taxation and has since become the leading voice for the sector on this issue. We have persuaded successive Governments to introduce a range of tax reliefs as well as arguing successfully that existing concessions should be maintained. CTG’s purpose is to represent to Government the views of its members on tax issues affecting charities. The voice of charities on Tax

What Happens While we Wait for Brexit? Nothing Everything remains in place until we actually leave (issues relating to judicial practice and policy formation below) The voice of charities on Tax

Transactions in the UK What is the range of government options for consumption taxes on domestic activity? The voice of charities on Tax

Alternatives to VAT If we have full-blown separation then we need not even use VAT. We could have: A basic sales tax only charged at the retail or wholesale stage and without an input tax concept Massive increase in income tax/property tax/wealth tax A company tax based on turnover to supplement corporation tax However, the general consensus is that the upheaval in removing VAT is too great and the alternative tax-take too difficult to predict to make this likely. And, the world has consistently been adopting VAT systems, so it would be perverse to move backwards by abolishing it. The voice of charities on Tax

VAT rates The EU system allows three rates of tax and an exemption: Standard rate Reduced rate Zero rates held over from accession Exemptions (social and financial) The standard and reduced rates are set ranges which until recently the EU was committed to harmonising but which (ironically) the Commission dropped entirely shortly before the referendum The voice of charities on Tax

VAT rates But the UK will have carte blanche to set rates: No top or bottom limit on the standard rate (Switzerland has an 8% rate) Possible luxury rate based on the nature of the product (e.g. handbags) – but note that a luxury rate on imported items is a tariff and thus will not apply outside of normal tariff arrangements Reduced rates applicable at our discretion (currently fettered by EU rules) and at any rate we want – and how many we want for each kind of supply We could abolish exemptions or increase the range, or change the ambit of those we have We could remove the zero rate for exports (though, practically speaking, that is not going to happen) The voice of charities on Tax

Will we abolish exemptions? Exemptions increase the complexity of the tax, owing to impact on VAT reclaim on costs. What are the reasons for them? Can make the question whether an activity is an economic activity irrelevant thus reducing unnecessary cases of VAT registration (e.g. residential rents) Allow the final supplier to be ‘seen’ as the final consumer, thus ensuring fuller tax take on what might otherwise be heavily subsidised low cost services Raises revenues for government indirectly every time standard rate increased Gives measure of VAT relief on a supply where there is added value or use of employed labour where otherwise high price would lead to high tax Gives false impression of being ‘tax free’ where social exemptions apply Is only practical solution where actual consideration value unascertainable, as with financial services. The voice of charities on Tax

Exemptions we are likely to keep Financial services where the value of the consideration can be difficult to determine, or is disproportionate to the underlying value of the service Insurance, as large proportion of value inherent in premiums is the cost of indemnities which are outside the scope of VAT. No genuine ‘value added’ Betting – though this is questionable. However, the ‘product’ is really just a mechanism for investing your money, and there is no real service Residential Property – to avoid small landlords having to register for VAT. And the nature of the service is somewhat passive and little activity involved The voice of charities on Tax

Social Exemptions Education Care/Welfare Health Physical Recreation Culture Professional Bodies and Trade Unions Housing Land Disposal of remains of deceased Postal services Charity Fundraising The voice of charities on Tax

At-risk exemptions Cost Sharing Professional/ Trade Union/ Philanthropic bodies Culture – perhaps kept but on a much restricted basis? Physical Recreation – perhaps kept but rationalised and possibly restricted to public bodies and charities? Land used for non-residential (business) purposes The voice of charities on Tax

Perhaps less risky exemptions Education The high employee costs for traditional forms of education, and the fact of free education being outside the scope of VAT makes it likely that VAT will not be added to education fees. But, a government would find it easier to tax fees charged by independent schools. It could more easily include commercial higher and further education colleges in an exemption. Health and care Again, high employee costs suggest that adding VAT would create an unpopular level of burden, but there is no guarantee that private hospital fees would remain exempt… However, it is difficult to see dentists and opticians being taxed. Indeed, glasses and contact lenses might become exempt. The voice of charities on Tax

Reduced Rates Would a range of reduced rates be introduced? Reduced rates replacing exemptions removes the incidental impact of changes in the standard rate Can be targeted on supplies to certain customers (not limited to supplies by certain suppliers or of certain supplies), thus opening potential lower taxation for (say) charities Much simpler to account for – no partial exemption (hurrah!) Many more businesses forced to register for VAT as making taxable supplies (where these are currently exempt) Can be fine tuned by selective rate changes from time to time Will create ‘winners and losers’ on any change from exemption to a reduced rate Huge increase in ‘borderline’ case disputes where supplies could fall into one or other rate band The voice of charities on Tax

Zero Rates Carte Blanche to extend these now we are free from EU control: Return to zero rated domestic fuel Return to zero rate for some listed building alterations Return to zero rated new commercial buildings (high cost) Rationalisation of zero rate on food Zero rate electronic literature to match printed material Extending zero rates for charity purchases Identifying high labour-intensive supplies and zero rating these Zero rating headline-grabbing products such as sanitary towels But bear in mind that zero rates do not always lead to lower prices….. (remember the airport shop scandal of 2015?) The voice of charities on Tax

Input Tax Input tax rules are partly controlled by EU law and principles and include: Concept of a ‘direct and immediate link’ with taxable supplies, such that the costs must be ‘components’ of the supply to which they relate. Disallowance of VAT incurred on entertainment. Full or partial disallowance on certain costs related to cars. Disallowance of costs arising in zero rated residential developments Legal interpretations relating to the question of to whom a supply is made. Special rules for pre-registration VAT. There is no obvious reason for any of the above changing, although there could be a gradual movement away from these principles. The voice of charities on Tax

Case Precedent (and authority of Courts) The EU requires all member states to apply the following process to case precedent: UK VAT legislation must be interpreted ‘in conformity’ with the Principal VAT Directive (PVD) Tax payers can pray the direct effect of the PVD in any case (though HMRC cannot per se) Any material doubt as to the meaning of the PVD in a given circumstance requires reference to be made (by any UK court) to the CJEU The reference is in the form of generic questions regarding which the facts of a given referred case are essentially a guide to decision making The CJEU decision (its answer) is binding in all EU courts as regards the relevant principles The actual case referred is then decided by a UK court though the answer tends to be obvious by that time There is no theoretical capacity for the UK court to dissent from the CJEU view (though the Supreme Court did just that in Aimia) The Commission can bring infringement proceedings against member states in CJEU The voice of charities on Tax

Position if wholly ‘out’ CJEU decisions post Brexit will not be binding but might be accepted as persuasive, particularly on ‘place of supply’. CJEU decisions up to Brexit are binding on UK court decisions up to exit. UK courts will continue to refer questions to CJEU but will probably ‘tail off’ near exit date. EU law will continue to apply to supplies made before exit and later CJEU decisions might still inform that, but not on post-exit supplies. The voice of charities on Tax

Less certain aspects of case precedent The following is hotly debated - a selection of views CJEU jurisprudence is embedded in a long line of UK court decisions and these will remain good law unless there are clear reasons to depart from them in the future – but there may be a ‘drift’ Any change of UK VAT law nullifies CJEU precedent in that respect A view prevails that Parliament intended to legislate to conform with EU law and this means that CJEU interpretation for unchanged law remains binding or highly persuasive Some say that all CJEU precedent is impugned and there will be a void of jurisprudence to fill… The voice of charities on Tax

The Mega-Issues that have been defined The CJEU has given us the following fundamental underpinnings of our VAT understanding: Whether a supply is a single liability or multiple Whether an activity is (or isn’t) ‘economic’ (AKA ‘business’) How we understand the link between inputs and outputs ‘Abuse’ (the VAT equivalent of the GAAR) Will the UK government legislate these concepts into our VAT law? The voice of charities on Tax

Questions? You have been listening to Graham Elliott @VatDaddy www.charitytaxgroup.org.uk 07796 950756 The voice of charities on Tax

Brexit – Implications for VAT